Initially announced in the 2015 federal budget, the Department of Finance released draft legislative proposals on July 31, 2015 that provide certain non-resident employers an exemption from Canadian payroll withholdings on payments to their non-resident employees temporarily working in Canada. The proposed legislation is effective for payments made after 2015.

Non-resident employers are required to withhold Canadian payroll remittances (Regulation 102 withholdings) for any employees physically working in Canada, regardless of whether the employee is a Canadian resident or a non-resident. The requisite payroll withholdings and rules are generally the same deductions that Canadian resident employers must remit and abide by. Before 2016, there was no de-minimis rule, such that even if an employee only spent one day of work in Canada, Regulation 102 withholdings would still apply. This presents an additional obligation for non-resident employers who are already required to deduct and remit payroll withholdings for their employees in their home country.

A non-resident employer can apply for a Regulation 102 waiver in order to avoid the requirement to withhold payroll deductions at source. All Regulation 102 waiver applications must be sent to CRA 30 days before the start of the employment services or the first payment, which can prove to be impractical, given that employee travel is often arranged at the last minute and obtaining the appropriate information can be time consuming. If a waiver is not obtained, a non-resident employee can still claim relief under a tax treaty by filing a Canadian tax return to obtain a refund of the Canadian payroll deductions.

New measures

Under the July 31 proposed legislation, a "qualifying non-resident employer" is exempt from the Regulation 102 withholding requirements with respect to amounts paid to a "qualifying non-resident employee."

Qualifying non-resident employer

A "qualifying non-resident employer" must be a resident in a country with which Canada has a tax treaty and certified by the Minister of National Revenue at the time of payment. Note that a U.S. LLC that is fiscally transparent may not meet these requirements.

To obtain certification, a new prescribed form, RC 473 (available here), will have to be completed and sent to CRA at least 30 days before a qualifying non-resident employee starts providing services in Canada. Although the certification will generally be valid for two years, it may be revoked if the employer fails to comply with Canadian tax obligations. Failure to be compliant in prior years will not preclude eligibility on a go-forward basis.

Qualifying non-resident employee

A "qualifying non-resident employee" must meet all the following conditions:

  • Resident in a treaty country at a time of payment
  • Exempt from Canadian income tax under a tax treaty
  • Works in Canada for less than 45 days in the calendar year that includes the time of payment, or is present in Canada for less than 90 days (including non-work days) in any 12-month period that includes the time of payment

Even if the conditions for a qualifying non-resident employer and qualifying non-resident employee are met, the qualifying non-resident employer will still be required to submit T4 information returns with related supplementary slips, (although a supplementary for a qualifying non-resident employee whose total taxable income earned in Canada under Part I of the Income Tax Act is less than $10,000 is not required). Employers will continue to be liable for withholdings with respect to non-resident employees found not to have met the conditions of being a "qualified employee."

Given the new requirements, employers will need to identify and track the residency status of employees and track and manage the number of days employees are physically present in Canada to benefit from the new Regulation 102 exemption. Furthermore, the proposed legislation does not provide relief from compliance with the information reporting requirements which remain in effect.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.